Macquarie banks on office recovery

Macquarie Bank's direct property syndicate arm has raised $102 million for its latest product, the East Coast Portfolio, aimed at both the retail and small institutional market.

It will be the bank's fifth such vehicle and the first since the 2003 product which owns the office tower at 1 Martin Place, the home of the bank.

Contained in the new syndicate are five B-grade office towers: one in Brisbane at 157 Ann Street, two in Sydney at 504 Pacific Highway, St Leonards, and 2-10 Wentworth Street, Parramatta, and two in Melbourne's CBD.

Macquarie Direct Property's chief executive, Richard Cutler, said the fund planned to return an average 8.5 per cent over a five-year period.

There will be no exit or entry fees and investors can enjoy 100 per cent tax deferment for the first three years. Hedging facilities are also in place as is a guarantee by the bank to acquire $100,000 in units per quarter from investors who may need to redeem before the fund ends.

Mr Cutler said the decision to buy the properties and launch the syndicate came amid expectations of an improvement in the east coast CBD office markets in the next 12 months.

"We believe there is upside in the leasing market and we plan to capitalise on the expected recovery in national office markets," Mr Cutler said.

"The acquisition values are at least 20 per cent below the replacement cost for the properties which gives us leverage for capital growth.

"The two Melbourne properties at 303 Bourke Street and 1 Nicholson Street were previously owned by other Macquarie Bank vehicles but we felt they offered us a good base for the latest syndicate."

Mr Cutler said the properties were only termed B-grade as the floor plates were less than 1000 square metres, yet the buildings were on A-grade sites and had a spread of 80 tenants across all the assets.

"There is a 5.6 per cent vacancy rate in the portfolio and as the leases come up for renewal we are confident the office market will have improved and rentals will rise accordingly."

Head of Macquarie property research, Rod Cornish, confirmed the bank's view that the office market would be on the upturn by the end of this year.

He said that while tenants would continue to rule the sector, conditions would turn back towards the landlord within the next nine months.

"At the end of 2004 we see a prolonged rise in demand for office accommodation in capital cities, particularly from the property and business services industries, which make up the largest employers in the CBD."

Mr Cornish said although he had not forecast any exact gains in rent he felt that the current high level of incentives, of as much as 30 per cent, offered in lease agreements would soon decline.

"The office supply coming into the Sydney CBD is low in 2004-05, once the current batch of high rises are built, and that will help take the incentive packages out of the market."

Last week the Property Council of Australia released its industry figures for the office sector. It said conditions would remain flat but there were signs of a turnaround from early 2005.

Listed property trust managers are also seeing stronger lease enquiries and while rents are flat, tenants are taking up options for more floors.